Jobs' big blunder is starting to cost Apple

New data on tablet sales reveal how Apple's reluctance to downsize its iPad gave rivals the opening they needed to steal market share.

By StreetAuthority Feb 14, 2013 11:08AM

In coming months, moviegoers will be treated to a pair of hagiographic films about Steve Jobs. We'll get to see Ashton Kutcher's impression of the legendary tech visionary in April. Later in 2013, a script being developed by Aaron Sorkin -- the man behind Academy Award winners such as "A Few Good Men" and "The Social Network" -- will hit the screen.

Count on both films to portray Jobs in a luminescent glow.

But more than a year after Jobs' passing, Apple's (AAPL) mojo is no longer rising. 

The mighty iPhone is losing market share to rivals, as critics rave about souped-up offerings from Samsung and others. And now the iPad may be losing steam as well. And on this score, even Jobs gets some blame.

10 inches -- or nothing
While Jobs was still firmly in control at Apple, he repeatedly stressed the need for a 10-inch iPad, even as rivals began to speak of smaller tablet computers. An early foray by Dell (DELL) with a 5-inch tablet was ill-conceived and quickly pulled off of the market. But tablet makers focusing on a 7-inch form factor started making waves. Even as these smaller tablet computers started to make inroads, Apple was undeterred. Finally, sometime in 2012, Apple relented and started to develop the specs for its own 7-inch device, known as the iPad Mini. 

That belated effort should have come sooner. In a recently-released report, research firm IDC notes that Apple is starting to lose its tight grip on the tablet computer market. The key culprit: 7-inch tablets. That's where Samsung, Microsoft (MSFT) and others have more squarely focused, so the tablet market share is beginning to shift. Apple still rules the roost, with market share exceeding 40%, but this figure used to be more than 60%. (Microsoft owns and publishes TechBiz, an MSN Money site.)

This isn't a simple case of the iPad Mini cannibalizing demand from the 10-inch version.

"Several other 7-inch tablets fared well in 4Q12 (Samsung Galaxy, Amazon (AMZN) Kindle, Google (GOOG) Nexus), driving a continuing mix shift to the smaller tablet form factor," noted analysts at Citigroup Research. "Overall, the 7-inch tablet group held 41.3% market share in 4Q12, up 12.6% from 2Q12; this compares to the 10-inch tablet group that held 40.6% share in 4Q12 versus 67.3% two quarters prior."

Perhaps the declining market share was inevitable. After all, the consumer electronics segment is littered with pioneering firms that eventually lost their grip. Sony's (SNE) Trinitron TVs, Nokia's (NOK) once-dominant cellphones, Motorola's RAZR and the Sony Walkman all once controlled their respective markets.

The trouble with a falling market share can be seen on the income statement as increasing commoditization within a segment leads to pricing pressures. Indeed, the iPad's average selling price fell more than 10% sequentially in the fourth quarter of 2012, which translates directly into shrinking profit margins. Apple posted 44% gross margins and 37% EBITDA (earnings before interest, taxes, depreciation and amortization) margins in fiscal (September) 2012. That's almost unheard of in the consumer electronics industry. And they are profit levels likely never again to be seen by Apple.

'It's all good'
Tim Cook, who took the reins from Jobs in August 2011, casually dismisses any talk of Apple losing its cloak of invincibility. At a Goldman Sachs investor conference this week, he suggested investors are too caught up in short-term thinking.

"We're managing Apple for the long term. I know people care about quarters and so forth . . . but the profound decisions we make are for Apple's long-term. Not the short, 90-day clock," he said, as quoted by CNET.

During the past decade, Apple has been able to keep nervous investors at bay by delivering a long string of blowout quarters. In return, the company was never pressed to articulate plans for future growth. But with growth rapidly slowing, and sales of once-hot products like the iPhone and the iPad starting to cool, can such a laissez-faire style of communication persist?

Probably not.

Instead, Apple's stock will mark time, until and unless the company can prove that it can either extend the runway for its current roster of products, or launch another pioneering product. Rumors of an Apple TV seem to fit that need, but the silence out of Apple's Cupertino, Calif., headquarters remains deafening -- several years after the first rumors started to swirl.

Until we see a glimpse of that TV, all eyes will remain on the iPad. In the third quarter of 2013, Apple is expected to launch new lighter, thinner versions with faster processors, as well as a version of the iPad Mini with Retina display.

In years past, consumers have been quick to toss their old units in the garbage and rush out to buy the new ones. It's fair to wonder whether these new devices will create the same level of frenzy.

Risks to consider: As an upside risk, Apple's bulletproof balance sheet can dole out all kinds of perks to investors, from huge stock buybacks to robust dividend hikes . . . so the stock doesn't have major further downside.

Action to take: It's a bit too soon to write Apple off. But it's not too soon for Cook to break a sweat and get Apple back on the path of stunning new product launches. The competition is clearly catching up to Apple. And the longer the company waits, the harder it will be to pull away from the pack. 

Indeed, companies such as Samsung, Amazon.com, Google, Asus and others likely feel newly emboldened by their market share gains, and are probably going to keep stepping on the gas. Even Sony, which hasn't even been much of a player in these segments, plans to make a major splash in the smartphone and tablet-computer segments. 

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34Comments
Feb 14, 2013 12:05PM
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The problem with Apple TV is that if Apple TV is that a big part of Apple business model is rapid turnover of devices and hardware based updates. That may work for phone and tablet market, but it wont work in the TV or Console Video Game market.  People are not going to replace a 50 plus inch TV every year or two for Apple model to work.
Feb 14, 2013 11:52AM
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From the article.....
 
Tim Cook, who took the reins from Jobs in August 2011, casually dismisses any talk of Apple losing its cloak of invincibility. At a Goldman Sachs investor conference this week, he suggested investors are too caught up in short-term thinking.
 
 
Yeahhhhh..........That's about as close to BS as you get!  I'll guarantee, Mr Cook has at least one eye on those quarterly reports at all times!
Feb 14, 2013 12:12PM
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....cook is worried - he's just not admitting it....

 

Apple has long worried that the cache' to the name has always been Steve Jobs....now that he is gone the whole dynamics and the way the company is viewed by the consumer can change dramatically.

Feb 14, 2013 2:03PM
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Without Jobs Apple is just another tech company.  They will have their ups and downs but they no longer have his vision.  Jobs was not a tech genius but he was a product development genius and genius is a hard thing to replace.  Right now they are living off of the last generation of products he produced and the competition has pretty much overtaken them.  Any one who pays premium prices for an Apple pad or phone at this point in time is pretty much either a disciple or a fool.  When Apple introduces a new game changing market creating product I will believe they can continue to expand upon the Jobs vision.  Until then I am a skeptic.
Feb 14, 2013 1:45PM
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Apple was a momentum play.  It has no model for sustainable rising EPS.  I am sure that is an upsetting statement to many, and will draw thumbs down.  But the thumbs down will not be becasue my statement is not true.  People are driven by emotion and people's emotions involving stocks and maybe especially Apple are blind.  So go ahead and give the post a thumbs down, but then post a rebutal. 

 

The fact is Apple ahs had rising earnings based on the release of one product after another.  Without the next product, where are the earnings to come from?  And it is a pretty tough trick to endlessly come out with a new product every six months.  I might say impossible.

 

I am not saying Apple is through, but the fast track to growth maybe.

Feb 14, 2013 1:47PM
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Coke for example grows year after year because OLD products remain viable and becasue it adds to the product line.  Apple relies on replacing one product with a new product.  Totally different model and a far more difficult one to pull off.
Feb 14, 2013 4:09PM
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Blasphemy !!  I was under the impression that Steve "god" Jobs never made a mistake. 

Feb 14, 2013 3:04PM
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"...7-inch tablets. That's where Samsung, Microsoft and others have more squarely focused,"

Microsoft has made a 7"tablet?? Hmm, that's new.

Feb 14, 2013 6:22PM
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It is quite amazing that after so many years people who write about Apple have not figure out that Apple has never cared about market share.  Business is about margin and profit through providing high price high value products.  The only time Apple has not followed that mantra is when Steve Jobs was not there and they almost went bankrupt.  Check out the relative margins on tablets, Apple ~40%, Amazon 7%, Google ~13%.  I presume this is why the people who wrote this article write rather than running a business.

Feb 14, 2013 3:50PM
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I will never own anything that requires a "data plan".  Waaay too expensive.  They are simply nerd devices.
Feb 14, 2013 2:51PM
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I do not own a Apple product nor have I ever. If Apple crashed and disappeared tomorrow, the only loss we would have is the billions of taxes that they never pay anyways!

 I hope Apple does crash, The Chinese work force will be hit the hardest and The American workforce will barely feel it as a passing breeze!

We sure will have a lot of upset, entitled, cry baby people though going through their withdrawals for the next newest greatest piece of over priced technology! Sure will be fun to watch!
Feb 14, 2013 4:56PM
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People should give up their smart phones and tablets.  It's making people dumb.  You need to get away from the technology, not take it with you.  And I own a successful software company.
Feb 14, 2013 7:37PM
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The day is over for Apple and it died with Jobs.

 

If Apple TV happens it is the last gasp from Jobs briefcase and then its over. Apple has no visionary and they are always impossible to replace when the person that started and runs the company is the visionary, which Jobs was,. Just look at Apple's performance while he was away the first time.

 

Not even Jobs original business partner Wozniak would try..

 

What Apple acheived during Jobs second run  is a complete ecosphere that allows them to control all aspects of their business and make money on everything they do.  Google and others are attempting to emulate this success but it will not happen again with the number of players in the game.

 

It was a nice run but now the next visionary will step up at some point and replace this Jugernaut at the top. It is only a matter of time, and only fools believe they will again rise above the recent peaks.

 

Just remember Microsoft was bigger than Apple when Mr. Gates resigned and they have never been the same since his departure.

 

 

 

Feb 14, 2013 3:01PM
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Apple corporation is not a good company.  How much of the money do they make goes to charitable gifts?  less than .1%.  What a bunch of blood sucking leeches.  For that reson alone I have never bought a Apple product.  They should be ashamed!  But they aren't because they do not care about anything but money!  Terrible company!

Feb 14, 2013 6:56PM
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I have a 7 inch off brand, and a 3.6 and 4" Samsungs. I love the small Galaxy's, they go on my belt , get my wi-fi, books, games etc...and are perfect for traveling.
Feb 14, 2013 10:31PM
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The key culprit: 7-inch tablets. That's where Samsung, Microsoft?

 

Are you kidding? Microsoft doesn't have an entry in the 7" market as far as I know.

Feb 14, 2013 4:04PM
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I'll wait for two or three years for a prepaid Samsung Galaxy no. that has all kinds of gizmos which will project HD 3D holograms of callers.  I figure $20 a month after the initial purchase will be just right. 
Feb 14, 2013 6:41PM
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John Wayne rode into the sunset, things change....so will APPLE ,THEY STILL HAVE A PRETTY STRONG TALENT POOL
Feb 15, 2013 7:31PM
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I really don't get this article. Is the author of this article taking shots at the deceased former head of Apple that he failed to make a monopoly and that competition is unhealthy. It's competition, isn't that what everyone wants?? The 7" screens are popular because they are CHEAPER than Apple's larger ipad. What the heck??!! I think MSN just puts out anything on their cyber-rag...

Feb 14, 2013 12:41PM
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I guess that means Apple is now being run by someone superior to Jobs...iPad mini done under Cook...Yeah!  The copy cat Android stuff is OK and lot's of companies are having to give it away at not only  zero profit but at a loss to compete,  that says, to me, Apple must have a superior product.

   The SIII may be a good phone but it is not gaining on the i-phone, dig deeper into the AT&T / Verizon statistics, Samsung may have market share but not in the segment where Apple competes, it is the low end that drives their numbers, that's why they DON'T RELEASE their sales numbers, so they can manipulate.  Windows devices which so far Microsoft has not taken the zero profit or sell at a loss strategy are doing badly...didn't even make your chart.  Sure there are competitiors, that's natural and so your market share will go down but the market is expanding so fast your sales go up. Also sales price reduction does not mean margin compression, it is about cost of goods, Apple is managing their costs through ever changing supply chain improvements/economies of scale and in-house designs.

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